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Vaughn Palmer: A ‘razor’s edge’ is an uncomfortable place to balance, even for a budget

B.C. Finance Minister Mike de Jong won’t be appearing in the Legislature anytime soon -- the Liberals cancelled the fall sitting -- but he’s cautiously optimistic the province will end the current financial year with a small surplus.

Photograph by: CHAD HIPOLITO
, THE CANADIAN PRESS

VICTORIA — When Finance Minister Mike de Jong delivered the latest update on provincial finances Tuesday, it was mainly a progress report on a budget-balancing struggle that began five years ago, almost to the day.

Sept. 12, 2008 was the last time that the B.C. finance ministry’s quarterly reporting on the state of the provincial budget was a generally happy affair.

The province, riding high on a surging economy and record sales of natural gas, had racked up four years of surpluses in a row, totalling $12 billion in all. The debt was down to one of its lowest levels in decades, measured as a share of the provincial economy.

Looking ahead, B.C. could expect more of the same in the year ahead, according to then finance minister Colin Hansen. Despite a dark cloud or two on the horizon, he forecast that the province would end the year with a $1.8-billion surplus.

He closed the briefing by hinting that before the provincial election scheduled for the following spring, the B.C. Liberals would offer another round of tax cuts, financed by those burgeoning surpluses.

That was Friday. The following Monday, a day that will live in economic infamy, Lehman Brothers declared the largest bankruptcy in U.S. history, triggering the gravest global financial crisis in modern times.

Among the many casualties was that surging B.C. economy and those record sales of natural gas, which slowed and then contracted, almost overnight. Before the March 31, 2009 financial year-end, Hansen’s projected surplus was trimmed to a shadow-of-its-former-self $65 million.

The Liberals tried to hold the line by freezing wages, reducing the public service by 5,000 positions (mainly through attrition), and capping budgets in most ministries except health.

Still, there followed four deficits totalling $5 billion on the operating side alone. The Liberals also practised massive stimulus spending on public works — schools, hospitals, roads, bridges, upgrades of the BC Hydro network — that pushed the provincial debt to record levels.

But the tide of red ink has finally been contained on the operating side, according to the quarterly update that de Jong released Monday. Spending is up a bit more than expected so far this year and revenues were up as well, though not by quite as much.

Still, the province, he maintains, is on track to end the current financial year with a $136-million surplus.

“Balanced on a razor’s edge,” as the minister conceded, given a $44-billion budget. But with $150 million in a forecast allowance and a further $180 million in the contingency fund as a hedge against a modest fluctuation in revenues or spending.

“We’re not out of the woods yet,” said de Jong. With each passing month, he’s more confident about the ability to remain on target for a balanced budget — even though he continues to entertain serious doubts about a global recovery, with signs from Beijing to Europe pointing in the opposite direction.

The Liberals face their own domestic challenges too, with de Jong admitting that the vaunted jobs plan needs to produce more results and hinting at a growing urgency regarding the big push to develop a liquefied natural gas industry.

There had been speculation that the Liberals would recall the house this fall to legislate their two-years-in-the-works tax and revenue sharing framework for LNG.

Instead, de Jong announced there’ll be no fall sitting. The new tax regime won’t be put through until the 2014 session, though he hopes the general outlines can be settled and shared publicly before the end of this year.

Not a moment too soon, judging from the expressions of concern from various players in the industry, who’ve been clamouring for details — details on the government’s proposed LNG revenue grab.

Progress on developing LNG for export to Asian markets is absolutely critical to the Liberals’ long-term economic plan, with its talk of a half-trillion-dollar windfall and making the province debt-free.

But natural gas is also critical to preserving existing resource revenues, given the way that prices have slumped amid a glut of the product in North America.

Looking back to the glory days of the past decade, natural gas royalties topped out at close to $2 billion. Last year, with prices driven downward by the boom in shale gas, royalties bottomed out at less than $200 million.

Heading into this year, de Jong retained economist Tim O’Neill to vet government revenue projections, with an eye to establishing an independent verdict in advance of the provincial election.

He passed most of the forecasts, but faulted the ministry practice of averaging 20 private sector forecasts, then discounting it slightly. “Too robust” for the current volatile market, said O’Neill, who persuaded the ministry to go with the lowest end of the range.

Which turned out to be right on the mark as a revenue forecast, as de Jong conceded Monday, while holding out hope that prices will climb higher if there’s a cold winter ahead.

A higher gas price would make it easier for him to complete the struggle to balance the budget in the current year.

But without a sustained recovery in the price, it is hard to see how he and his colleagues can keep their promise to keep the budget in balance for the next four years.

B.C. Finance Minister Mike de Jong won’t be appearing in the Legislature anytime soon -- the Liberals cancelled the fall sitting -- but he’s cautiously optimistic the province will end the current financial year with a small surplus.

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